Mike Passanante: Hi, this is Mike Passanante. And welcome back to the Hospital Finance Podcast. Today, I’m joined by Fred Horton who is President of AMGA Consulting. Fred has over 20 years of experience working inside the healthcare industry and has served in several senior level leadership positions inside healthcare organizations including serving as CEO of two medical groups and one integrated health system.

Mike: Fred, why don’t you start out by telling us a little bit about AMGA Consulting?

Fred: Sure! I appreciate the opportunity to do so. We formed AMGA consulting—we’re going on our 5th year actually. And it is made up of a group of very senior past CEO’s—chief operating officer, et cetera—folks, both physician and executive who have worked inside healthcare. And it allows us to reach out to our members and give them added benefits by working with individuals who have been in their shoes in the past.

We focus on a very wide range of practice management topics, everything from physician and provider compensation development to strategic planning to operations improvement. And we also have started to focus on physician recruitment and retention plans.

Along with our consulting work, we complete several industry-leading surveys each year. And those are done on provider compensation, finance and operations, executive compensation and benefits.

Mike: That’s a great segue, Fred, into talking about the Medical Group Operations and Finance Survey. Why don’t you briefly explain why that survey was initiated and who you surveyed?

Fred: Sure! In the past, what we did is, as part of the physician compensation or provider compensation survey, we had some operations and finance questions embedded in that survey. And as the market has gotten more competitive and actually more challenging, we’ve had a number of our clients and our members come to us and ask if we could do that survey on a standalone basis and get down into more detail as far as what’s driving operational and financial performance.

And so, this is the second year that we’ve done the standalone survey. And it’s really been completed because as organizations have grown the number of physicians, they’ve wanted to understand better what they should be striving for in terms of performance, both operationally and financially.

The other aspect is the marketplace has moved toward more of an integrated model where more physicians are actually employed by health systems. And there are some unique aspects to the way that the accounting takes place within integrated systems that tends to lead us to numbers that are actually—they look like a loss, but we’d like to term them “investment per physician.” And so health systems across the country are struggling with what is the appropriate investment that I should have per physician.

So, by doing the survey on a standalone basis, we’re really able to get not only aggregate data, but the detail that drives it which is extremely important, things like staffing levels, productivity levels, overhead expense, how overhead is allocated, et cetera.

And so, we’ve embarked upon that journey. And as I’ve mentioned, we just completed the second annual standalone survey.

Mike: So, let’s drive right into the survey results then. First, why don’t you tell us what you found at the physician level in terms of operating income and loss?

Fred: Sure! Overall, what we saw in the marketplace as it continues to get more challenging, in 2016, the operating loss (or again, what we’d refer to as “investment per physician”), in aggregate across the entire group of respondents was $95,138. So, an investment of $95,138.

That increased from 2016 to 2017 results to $140,856 as an investment per physician. Another way to look at that is to say performance eroded during that period of time by about $45,718 per physician in aggregate at the median level.

And that went from an investment per physician of about 10% of revenue to an investment per physician of about 17.5% of revenue.

One of the other things that we saw—and I think what we’re seeing in the marketplace is really a perfect storm. So, gross revenue actually increased during that same period of time. But net revenue actually decreased.

And so, what we’re seeing is there’s an increase in the number of services that were being provided. But as it relates to the revenue that’s coming into the organization in order to cover expenses, it’s actually going backwards. And we’re seeing a lot of erosion on the payer side of the marketplace. And that’s leading to results that tend to drive toward the loss side or the investment side.

Mike: Ok, you did find some differences in the income of private physician practices versus integrated health systems, isn’t that right?

Fred: We did. And I’ll try to draw out some of the nuance of this as well.

So, on the private practice side, in 2016, respondents reported actually an investment per physician or a loss of right at about $14,000. Now, I would tell you that every private practice endeavors to get to approximately breakeven. And the reason for that is tax avoidance strategies. So, they tend to pay out all the dollars that they bring in.

And so, in a few of the organizations obviously (because this is reported a median), they may have drawn upon their line of credit to come up with a loss of about $14,000. Basically break even though.

However, in 2017, their performance actually improved to a profit of approximately $2,300. So the delta on that was about $16,000. In other words, performance improved in independent groups by about $16,000 during that period of time.

Now, when we look on the integrated side in 2016, the roll-up loss or investment per physician was right at $212,000. And in 2017, that increased by about $32,000 to an investment or a loss of $244,000 per physician, round numbers.

And so, what we’re seeing is that, on the integrated side, the losses are becoming greater. On the private practice side, the performance was stronger in 2017 than it was in 2016.

Now, the reason I keep going back to the terminology of investment per physician is that what happens on the integrated side, when their profit and loss statement is created, health systems typically have taken the ancillary services that you would find in a private practice, and they’ve repartitioned them and assigned them to a system profit center. So, you have all your ancillaries that you normally have on the private practice side get credited elsewhere. And obviously, when that happens it produces an accounting investment per physician or an accounting loss per physician.

And that’s one of the things that we always suggest our client manage, really understanding the allocations and understanding the impact of the allocations. And in my experience, in integrated systems or private practice, physician culture and their engagement in the environment is really important. And so suggesting that, just because there’s an accounting change, “Now, doctor, you’re losing dollars for us” is not something that’s going to help to strengthen the culture.

And so, we always talk about how we partition the financials so that you really understand where the performance lies.

And it isn’t necessarily the physicians fault that, in the past, they made money, and now they’re booking a loss. It actually can be from the accounting treatment that occurs within the integrated delivery system.

Mike: Very interesting! This is sort of a big question for you. But given what you’ve seen in the survey and in past surveys and where you think things are going, do you have any suggestions for how practices can improve operational costs and processes to help them grow revenue?

Fred: Yeah, I think that, overall, I would suggest that it’s an issue of alignment within the organization. And so we talk a lot about again engaging physicians, engaging the management team, but really looking at alignment of authority, responsibility, and accountability. Those three move together.

And so, when you get into the detail or the input of a profit and loss statement, we would say that the major top ten items that impact the overall P&L should be broke down. And you should actually assign the responsibility to various parties.

So, an example of that would be physicians do need to be responsible. They need to have authority and accountability over their own production. So you have to have reports that are going to tell them where they’re at, so that they really understand this.

The flipside of that though would be if your executives who are responsible for payer contracting tend to execute payer agreements that benefit the hospital, but not the medical group, and they’re not keeping pace with inflation, then they need to be held accountable for that.

And it isn’t appropriate to take the poor performance on the payer contract and lay that on the back of the physician.

And so, when we address an organization and work through a process to improve their performance, we take a look at the top ten line items that contribute to the P&L. And then, we would actually assign the authority and responsibility and accountability to either physicians, the physician and their executive team working in partnership. It may be at a system level for things like facilities or payer contracting rates.

And the end result of that is then you’ve created a gap to the marketplace. You understand what you’re delta is for performance. And you have to get that finite on this. And then, you can hold folks accountable and understand that it really is a team sport and everybody is working toward that end.

We recommend that you track that on a monthly basis. You have a feedback loop and a follow-up. And it’s a very transparent process.

What I have seen with that approach, Mike, is that it tends to engage physicians in a way that they’re typically not engaged because what they see is that they’re not just part of the problem, they are part of the solution, but others are responsible for helping the situation to improve as well.

Too many times, I think within integrated health systems, physicians get recruited, you build up your physician complement and your physician group. And then, suddenly, within the normal day in/day out conversation, folks start to refer to their performance as being losing. And yet, if you look at it from the physicians’ perspective, they have the same staff they’ve had in the past, their productivity is roughly the same, et cetera. They really haven’t changed anything, and they’re trying to make it go.

And so, using terminology like losses or losers or loss per physician can really start to erode the culture. And they feel put-upon.

And the process that I just mentioned really engages them, engages the executive team, and can lead to fundamental change.

Mike: Great thoughts there, Fred. If someone would like to get a copy of the survey results or learn more about AMGA Consulting, where can they go?

Fred: I’ll give you two ways to do that. You can go to AMGAConsulting.com, and you will find an overview of our consulting organization. And there’s also a link that will take you to AMGA.org. And when you’re at AMGA.org, you can navigate to the store. And the store sells all of the surveys that we’ve completed in the past.

And if individuals in the future would like to participate in the survey, they will get the results for free. We would love to continue to expand the reach that we have with the survey, so that we can have more and more data that will be helpful to the marketplace.

Mike: Certainly very informative. And we thank you for your time and for stopping by the Hospital Finance Podcast today, Fred.

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